Currency volatility is the frequency and extent of changes in a currency’s value. It is measured by calculating the dispersion of exchange rate changes around the mean, expressed in terms of daily, weekly, monthly or annual standard deviations. The larger the number, the greater the volatility over a period of time.
Episodes of currency volatility are a normal occurrence in a world of flexible exchange rates. During such episodes, companies with inadequate hedging programs in place are likely to feel the impact of proportional volatility in terms of their performance.